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February 18, 1999

COMPAQ-MICROSOFT RELATIONSHIP SCRUTINIZED IN COURT

By CBR Staff Writer

By Dan Jones in Washington

The Department of Justice tried to portray Compaq Computer Corp as Microsoft Corp’s poodle – barking whenever Redmond told it to – at the antitrust trial Thursday. Lead government attorney David Boies highlighted several specific deals or events that he claimed showed that Microsoft and Compaq were joined at the hip. Most significantly, Boies pointed to the signing of two separate Market Development Agreements (MDAs) between Compaq and Microsoft on the same day – April 1, 1998; one of which, according to Boies, merely presented the public face that Microsoft wanted other OEMs and the DOJ to see, while the more favorable agreement was the real deal. Boies introduced a document, which was sent on December 20 1997 to all of Compaq’s top executives, including CEO Eckhard Pfieffer, which read, Given Microsoft’s concern that our agreement be ‘defendable’ to other OEMs and the Department of Justice, we recently proposed an alternative structure where we would use side-agreements to complement the Client OS license and MDA. Compaq executive John Rose, on the stand for a second day, suggested that Compaq had chosen to sign two MDAs because it wanted to avoid a bureaucratic accounting process and limit knowledge of the pricing agreements contained in the MDA to a select group of employees, in order to prevent leaks to other OEM manufacturers. Outside on the courthouse steps, Boies characterized the confidentiality as a thin explanation. He had earlier accused Compaq of passing Microsoft confidential information about a rival operating systems developer. In November 1998, Compaq had negotiations with BeOS Inc concerning the use of its multimedia OS – in a Windows CE-style context for digital appliances – for which the company signed a non-disclosure agreement (NDA). The witness said he was unaware of any talks or any disclosure. Outraged by the claim that Compaq had violated Be’s confidence, the counsel for Compaq, Bill Coston, accused Boies of a cheap theatrical stunt and demanded to know the source of the allegation. Boies said that Mr Trey Smith – a VP at Compaq – had acknowledged the breach of agreement. With the Compaq counsel still visibly aggrieved, Judge Jackson told Boies to move off that line of questioning. Microsoft has recently unveiled a new version of Windows CE and Compaq has produced a PDA based on it.

Trial talk with Bill?

The prosecution also raised the issue of whether John Rose spoke to Bill Gates about the trail. The court was read a snippet of an internal Microsoft memo by Bill Gates, dated November 2 1998, which ran, I thanked Rose for all his trips to Seattle and his willingness to distract a lot of time for the lawsuit. Questioned about this, Rose said that he had traveled to Seattle to talk about the NT OS. He was adamant that he never discussed the trial with anybody from Microsoft. Following on from Wednesday’s testimony, Boise returned to the February 8, 1995 agreement between Compaq and Microsoft concerning MSN icons on the Compaq consumer PC range. Compaq started negotiations about putting America Online Inc’s icon on the desktop in April 1995. The talks between Microsoft and Compaq on the terms of the OEM pre-installation kit (OPK) – that the MSN and Internet Explorer icons would be featured on the desktop – began in late July 1995. Compaq’s Gary Stimac asked for clarification of the OPK rules on or around February 3, 1995. Microsoft and Compaq settled the OPK terms in a verbal agreement on August 8. This was then backed by a letter from Microsoft’s Don Hardwick on August 15 laying out the business rules, which was supposed to have been distributed by Compaq’s Lori Day. This was followed again on August 23 by the agreement which gave AOL turf rights on the desktop, violating the OPK agreement, which Rose said the Compaq negotiators had been unaware of when they signed the AOL deal. Boies expressed doubts as to whether there had ever really been an oral agreement between the two companies, claiming that Microsoft had threatened Compaq with the loss of its Windows 95 license the following year because it was worried about the AOL and Netscape Communications Corps icons on Compaq Presario desktops. In what was generally a bruising day for Microsoft, spokesman Mark Murray did manage to dispute this claim – highlighting letters that Microsoft had written to Compaq which contained no mention of the removal of rival icons and simply asked for the reinstatement of the MSN icon, as per the OPK rules. The session largely went the DOJ’s way, however, as the Microsoft team once again accused the government of trial by snippet and of not tackling the substance of the written testimony – while at the same time the company itself declined to address the DOJ’s allegations. On the issue of the day, specifically the two MDA agreements, the press gathered on the steps of the courthouse were limply told to wait for today’s final defense examination of John Rose. The previously jocular Compaq man appeared to be increasingly weighed down with troubles as yesterday’s litany stacked up against the defense.

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